Renewable Projects in India: What to adopt-CDM or REC?

Renewable Energy is being betted on as the new sunrise sector of India. Within the broad renewable energy space – wind and Solar are the ones where the potential is high and relatively easier to monetize (as against say biomass or biogas).

Only 7 % of electricity supplied in India is generated from the renewable energy sources. The share of RE in installed power is slightly higher than this due to the fact that generation in RE is not continuous and predictable as in the case of conventional sources. Among the various financing/subsidy mechanisms for Renewable Energy projects, Clean Development Mechanism (CDM) introduced by the Kyoto Protocol has been very important contributor in the last 4-5 years. Carbon credits generated from CDM registered-verified RE projects are important revenue streams in the financial closure and decision making for high capital cost projects in RE. Following table shows CDM revenues earned by the Indian Renewable Energy projects. As can be seen, the cash inflow driven by CDM component of RE projects is upwards of 900 crores INR, translating to 200 million USD.

Sector

No of Projects

CERs

Revenue in INR

Wind

139

75,31,244

406,68,71,760

Biomass

166

74,82,864

404,07,46,560

Hydro Power

70

19,10,321

103,15,73,340

* Issued CERs volume till December 2010.

The graphs below indicate the share of India in the registered projects by RE class and share in the CDM revenues.

RECs

India has recently launched the Renewable Energy Certificates (REC) mechanism to encourage Renewable Energy generation in the country. Similar mechanisms have been operations in the developed markets such as Australia, Europe etc. By mandating a growing percentage of electricity mix to come from renewable sources for the distribution companies, REC mechanism is expected incentivize RE generators. REC mechanism views the electricity generated from renewable sources as composed of 2 benefits – one the power generated and second is the environmental attribute with the ‘renewability’ of this power. Second part is known as REC will be traded in the energy markets of India. REC price range would be in the range of 12000- 15000 INR for the solar projects and 1500-3900 for non solar projects (1REC = 1 MWh of electricity). What REC achieves is to treat the environmental benefit of renewable power separately and values it as a tradable commodity as against the fixed feed-in or preferential tariff. Since the introduction of REC mechanism, three Renewable Energy (RE) generators have registered and four have accredited their projects on REC registry of India (Feb 2011).

REC or CDM or is it and?

Loaded with the technical details of the Renewable Energy technology already, renewable energy project developers face the confusion of mechanism to follow – the REC or the CDM. The developers also need to understand if the two can be accessed simultaneously. The choices made at the beginning stage of the project are essential since they will determine the financial profile of the project over the entire life cycle of the project.

The important considerations to be kept in mind are as under

CDM is an international mechanism instituted under the Kyoto Protocol. The relevant conditions for registration under CDM are additionality and contribution to sustainable development.

REC is a national mechanism. To be eligible for this mechanism, the PPA for the power project must be signed at the Average Purchase pooled cost (APPC) and not at the preferential tariff. The APPCs for various Indian states are as under Andhra Pradesh – Rs 1.78/kWh, Maharashtra- Rs 2.43/kWh, Karnataka – Rs 1.85/kWh, Kerala – Rs 1.46/kWh, Tamilnadu- Rs 2.62/kWh, Gujarat- Rs 2.21/kWh, Rajasthan- Rs 2.48/kWh.

Thus, the question of having to choose between CDM and REC does not arise. As long as the condition for the ‘additionality’ – i.e. the project being financially not-most-attractive in absence of carbon credit revenues is fulfilled, the project developer can continue to access REC market as well as the carbon credits under the CDM framework. Since there are only a few projects registered under the REC mechanism and the market of RECs will take some time to develop, the price discovery of RECs will happen only after significant volumes expansion. Till such a time, the REC market and CDM markets are not expected to interfere with each other.

The more appropriate question should be whether the RE project developers should sign up for REC mechanism by signing PPA at the APPC and registering themselves under the REC registry or to lock-in the state utility at the preferential tariff.

Some of the other aspects that need to be kept in mind in analyzing the profitability of RE projects under the REC mechanism are –

The range of price at which PPA will be signed with the state utilities is significant across states. This is partially driven by the composition of the current portfolio of states energy mix. States such as Tamilnadu and Maharashtra for which renewable constitute a significant portion of energy bought by the distribution companies. This energy coming in at a higher price has increased the APPC for these states. This implies that the any renewable energy project coming in the states with a higher APPC is likely have a lower working capital requirement since a larger portion of their overall tariff will be provided by the utilities and the realization will depend less on the trading of RECs.

The durations of PPAs need to be comparable between the preferential tariff sale and the sale at APPC to state utility. This can create a difference in which the 2 cases need to be addressed.

We can undertake both CDM project development and REC management for our clients. Do get in touch with us for more details.

Hi,
I am a student and an avid green activist from Germany. Currently as I was browsing through the state of green regulations in various countries for a project, I came across the following article and several other contradictory quotes about green enforcement but without sacrificing anything esp from developing countries.

Green regulation must not mean lapse into licence raj: Manmohan at [link suppressed.]

I am interested to understand views of people with local exposure to this – I would really appreciate a post on what could be a good way to balance green initiatives without paying a price of growth, if that is possible at all.

Superb article, especially in the light of the dilemma that project developers are facing. My stance on the REC V/s CDM battle is that we can, technically and logically, avail benefits of both the mechanisms. The CDM framework was drafted to contain carbon and other GHGs. The REC framework is the corollary to the RPO/RPS regime being implemented by the CERC. The “renewable energy” component of the RE projects will be needed to offset the RE targets set forth the utilities by the government for various externalities other than carbon. For e.g Energy security and checking environmental degradation also lie in the interest of the government, and thus they want the energy mix to be greener. Wheras the “carbon” component of the energy can definitely be traded for the GHG reduction program of the UNFCCC. REC works only for Renewable energy generators, wheras CDM cuts across various sectors and platforms for compliance. The purpose of the two mechanisms are diverse and thus can definitely be considered together for a RE project.

Proving additionality in such a case will definitely need creativity on the part of the consultant.

I don’t agree with difficulty in additionality – leave away the creativity! RE projects do have long pay back periods – the REC mechanism is not going to reduce the pay back period. It is splitting the cash flow into 2 as against a single stream in the case of preferrential tariff. What the developer got from a single entity will not come in the form of 2 different revenues – labelled differently. One as the APPC and other as the REC component.

This is going to create uncertainty for the developers, though the floor prices are established – it will only be after a few rounds of trading that the price of REC will be discovered and that too does not ensure a steady cash flow. Given this – I would say the RE projects such as biomass/wind/biogas/solar definitely continue to be additional. The REC mechanism does not alter their additionality.

There are two possibilities for availaing REC benifit
One you were selling your electricity to the third party through open access
Second one is you have to sell electricity at APPC(Average power Purchasing Cost) Not by Preferential feed in tariff .
In both the cases you are eligible for availing REC benefits

I am company secretary of a company which is engaged in wind power and biogas power sector now the company want to expand its business in existing as well as solar power sector so i want to know about the new projects and rec and carbon cr. In which our company expands its business.

[…] Each of these factors in itself and in combination presents new opportunities and challenges for the sector in India. With the continued support from the Government and investor bullishness on the sector, the renewable sector is bound to reach higher levels of adoption and significance for India’s national grid and energy mix. (Know more about Renewable Projects in India: What to adopt-CDM or REC?) […]

Search for:

Follow Blog via Email

Enter your email address to follow this blog and receive notifications of new posts by email.

The below calls for input are now open until 8 August 2015 at 24:00 GMT. More information is available at the following link: http://cdm.unfccc.int/public_inputs/index.html + Call for public input on the draft new methodology "AM00XX: Electric taxiing systems for airplanes" (10 July to 8 August 2015, 24:00 GMT) + Call for public input on the draft […]

New standard for rural electrification adopted Bonn, 24 July 2015 - Improving the lives of people without access to electricity is the motivation behind a new standard adopted by the Executive Board that oversees the Kyoto Protocol’s Clean Development Mechanism (CDM). The new standard enables crediting emission reductions from electrification of rural commun […]